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Orgasm. That's the word that comes to mind when one looks at the consolidated numbers reported by Tata Metaliks for the past financial year. Profit after tax increased from Rs 21 crore in the second quarter to Rs 26 crore in the third to Rs 49 crore in the fourth (25 million shares outstanding) of 2015-16; first quarter profit after tax was Rs 27 crore.
The key lies in the fact that the company has been able to successfully transform its low-value pig iron hot metal into high-value ductile iron (DI) pipes. Following the announcement of the results, the Tata Metaliks counter has been giving the Indian rope trick guys a complex. But, there is still attractive value in this company if you care to read me out.
One, the company reported an Ebitda (operating earnings) of Rs 65 crore in the last quarter (after deducting Rs 12 crore of what appears to be a one-time incentive that may not recur), which a naïve analyst like me will multiply by four to arrive at the conclusion that perhaps Rs 900 crore is not a vulgarly high market cap for this Tata company.
Two, the interest cover of more than seven (when the country is still in a state of slowdown) tells me that when profits increase, the increased interest cover could get into the really high double-digits.
Three, the company is at the cusp of a significant expansion - even as pig iron capacity will remain the same, the company has selected to expand it coke oven capacity (to reduce costs), commission a 10 Mw waste heat recovery system (to reduce costs) and increase its ductile iron pipe capacity nearly 50 per cent to 200,000 tonnes per annum. And, here comes the coup de grace: this capacity is likely to be commissioned by the end of this month.
Four, it would have been reasonable for the company to load a mix of accruals and debt for this proposed expansion. I am not privy to the funding mix, but if one goes by the statements of the managing director who feels the company is likely to graduate to a gearing pattern in line with the other Tata companies, then my hunch is that this must have been significantly (if not completely) funded by accruals. So, as soon as the enhanced capacity goes on stream, the company could probably repay debt with a vengeance, triggering yet another round of profit growth (that makes it two profit rounds without factoring improved pig iron realisations whenever that happens).
Five, based on the increased DI pipe output, the proportion of pig iron consumed captively is likely to increase from 20 per cent to 45 per cent, strengthening value-addition.
Six, I trust this management; it kept its lips sealed to the point that the stock did not run up before the results and gave investors like you and I the chance to buy cheap after the performance was announced.
As the world increasingly realises that this is a DI pipes company with efficient integration (pig iron available as hot metal), dreams will be made, research reports written, buy calls issued and fancy price-to-earnings projected. Sell, then, and move to the next big story.
The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed